There are five Internet companies—Apple, Google, Microsoft, Amazon and Facebook. Together they have a market capitalization just under 3 trillion dollars.

Bruce Schneier has called this arrangement the feudal Internet. Part of this concentration is due to network effects, but a lot of it is driven by the problem of security. If you want to work online with any measure of convenience and safety, you must choose a feudal lord who is big enough to protect you.

Google and Facebook are on their way to a duopoly in online advertising. Over half of the revenue in that lucrative ($70B+) industry goes to them, and the two companies between them are capturing all of the growth (16% a year).

Apple and Microsoft have a duopoly in desktop operating systems. The balance is something like nine to one in favor of Windows, not counting the three or four people who use Linux on the desktop, all of whom are probably at this conference.

That is the state of the feudal Internet, leaving aside the court jester, Twitter, who plays an important but ancillary role as a kind of worldwide chat room. [1]

There is a difference between the giant Silicon Valley companies and Goldman Sachs, Citicorp and the big Wall Street banks. The Silicon Valley companies have created value. The Wall Street banks, by and large, have destroyed wealth.

I depend on Google; I found Ceglowski’s talk through Google Search. I use Apple products; I’m typing this post on my i-Mac. I don’t use Facebook or Windows, but many of my friends do. I try to avoid ordering books through Amazon, because I disapprove of the way Jeff Bezostreats Amazon employees and small book publishers, but I use subscribe to Amazon Prime.

I don’t deny the achievements of the founders of these companies, nor begrudge them wealth and honor. But I do not think that they or their successors have the right to rule over me, and that’s what their monopoly power gives them.

Alex Tabarrok, an economist at George Mason University, pointed out that the market value of Microsoft increased by $18 billion Friday when CEO Steve Ballmer announced his retirement. Tabarrok made an interesting argument that if the choice of a CEO really changes the value of a company by $18 billion, then it isn’t unreasonable to pay the CEO an eight-figure salary.

Steve Ballmer

Of course if you valued corporate employees by the damage they could potentially do, many of us would be paid more than we are. When I was a newspaper reporter, I saved my company millions of dollars by not writing anything that was libelous, but I don’t think that ever was reflected in my paycheck.

One of Ballmer’s bad innovations was “stack ranking,” which meant ranking employees in order of some performance standard and firing the ones at the bottom. One thing wrong with that is that it gave the employees an incentive to undermine each other rather than working together to make Microsoft a good corporation. The other is that, as W. Edwards Deming noted, rank order is meaningless. What counts is whether your performance meets or exceeds the desired standard.

Microsoft is a once-dominant company in its industry—like Sears Roebuck, like General Motors, like IBM, like Kodak—that is resting on its laurels while competitors forge ahead, Kurt Eichenwald reports in the current issue of Vanity Fair. Its stock price has barely budged in the past 10 years, while the price of Apple Computer’s stock has increased 10-fold. Just one Apple product, the i-Phone, brings in more revenue than Windows, Office, Xbox, Bing, Windows Phone and every other Microsoft product put together. Last week, after Vanity Fair went to press, Microsoft reported its first quarterly loss since it became a public company.

Eichenwald puts the responsibility on Bill Gates’ successor, Steve Ballmer. He indicts Ballmer for all the usual sins—too much bureaucracy, too much caution, short-term thinking—but he sees the heart of the problem as a management practice called “stack ranking,” which was pioneered by CEO Jack Welch of General Electric.

Every current and former Microsoft employee I interviewed—every one—cited stack ranking as the most destructive process inside of Microsoft, something that drove out untold numbers of employees. … …

“If you were on a team of 10 people, you walked in the first day knowing that, no matter how good everyone was, two people were going to get a great review, seven were going to get mediocre reviews, and one was going to get a terrible review,” said a former software developer. “It leads to employees focusing on competing with each other rather than competing with other companies.” … …

For that reason, executives said, a lot of Microsoft superstars did everything they could to avoid working alongside other top-notch developers, out of fear that they would be hurt in the rankings. And the reviews had real-world consequences: those at the top received bonuses and promotions, those at the bottom usually received no cash or were shown the door.

… … As a result, Microsoft employees not only had to do a good job, but also worked hard to make sure their colleagues did not.

“The behavior this engenders, people do everything they can to stay out of the bottom bucket,” one Microsoft engineer said. “People responsible for features will openly sabotage other people’s efforts. One of the most valuable things I learned was to give the appearance of being courteous while withholding just enough information from colleagues to make sure they didn’t get ahead of me in the rankings.”

Worse, because the reviews came every six months, employees and their supervisors—who were also ranked—focused on their short-term performance, rather than on longer efforts to innovate.

“The six-month reviews led to a lot of bad decision-making,” one software designer said. “People planned their days and their years around the reviews around the review, rather than around products. You really had to focus on that six-month performance rather than what was right for the company.”

It is as if you had a football team, in which the two best players would get huge bonuses and the worst player would be dropped after the end of the season, regardless of the team’s won-lost record for the season. How could they even function as a team? Each individual would focus not on the score, but on making himself look good, and his teammates look bad.

W. Edwards Deming, the father of Total Quality Management, strongly opposed performance reviews and merit ratings. Rank order is meaningless, he said, because, among any group of people, the differences are usually not statistically significant. Usually the whole group is doing well, or doing poorly, and it is usually for reasons that group members don’t understand or don’t control. The key to quality management, he said, is figure out what those reasons are.

It is true, Deming said, that sometimes there are people who are so outstandingly good at what they do that what they do is in a different category from all the rest, and there are other people who are completely unable to do their jobs. But it always will be obvious who these people are. It is not worth bothering about differences among people so minor that you have to do an evaluation process to determine what they are.

Deming thought most people have an innate desire to do work they can be proud of, and management’s desire is to show them how. His ideas were fashionable 30 years ago, but they are in eclipse now. The prevailing idea now is to sort people into winners and losers, reward the winners and punish the losers. to be rewarded. And anybody who, by some definition, is a loser is not worth bothering about or listening to. The result is a kind of Hunger Games society in which people are too concerned with surviving high-stakes competition to be able to think of whether there is a better way.

Is Bill Gates one of the world’s richest men because he is smarter and harder-working than everybody else? Or is his wealth due to luck?

Malcolm Gladwell in Outliers points out the advantages Bill Gates had. First, like many of the pioneers of the computer industry, he was born in the 1950s. He came of age just when Altair introduced the first do-it-yourself personal computer kit was introduced in 1975. Moreover, as a teenager, he attended one of the few private schools with its own state-of-the-art computer, and graduated from high school with thousands of hours of experience in programming – an opportunity that very few people had in that era.

Microsoft Corp. took off when IBM Corp. commissioned him to provide an operating system for its new PC and neglected to require Gates to sign an exclusive contract. If IBM had done so, Gates would never have been able to make the MS-DOS operating system a standard for the whole computer industry.

So, yes, Bill Gates had opportunities that nobody else had, but he had the intelligence and determination to use these opportunities in ways that not everybody would have done. And, yes, somebody else would have created a standard computer operating system if Microsoft hadn’t done so, but it was Bill Gates who would have done so. Yes, success depends on good luck, but, as Louis Pasteur said, chance favors the prepared mind.

Even when success is wholly a matter of luck, as in a lottery, you need to offer a prize if entice people to enter the lottery.

I don’t begrudge Bill Gates his billions. He helped create something of value. The only people I resent are those who got rich not by creating something of value, but by milking the system to enrich themselves at others’ expense. Unfortunately we don’t have good ways of distinguishing between the two.